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Article Artículo

Are We Suffering from Too Many or Too Few Workers?

Binyamin Appelbaum had an interesting piece in the NYT more or less summarizing views of economists on the economy's near and long-term problems. The piece reflected the incredible confusion among economists. This raises the obvious question, if economists really have no clue about the economy, why do we waste good money on them?

Anyhow, we find that we are suffering from too many workers (high unemployment) and likely to continue to experience high rates of unemployment for the indefinite future due to a lack of demand in the economy. A big part of the problem from this view is that with the inflation rate near zero, the real interest rate (the nominal interest rate minus the inflation rate) can't fall low enough to bring the economy back to full employment since the nominal interest rate can't be negative (or at least not with conventional policy).

At the same time that the economy is suffering from too many workers we are supposed to also be troubled by the prospect of too few workers. Hence it is bad news that immigration has slowed, and for the longer term future, the birth rate has dropped. It's a bit hard to see this one. There could be an argument that shortages of workers with specific skills are holding up the recovery, but believers in markets know that shortages manifest themselves in rising prices, or in this case wages. There are no major areas of the economy (by occupation or location -- sorry North Dakota ain't major) with rapidly rising wages. So it's hard to see how getting more workers would provide a big boost to the economy. (More foreign doctors could drive their wages down to the averages for other wealthy countries, but I wouldn't consider this a big macro effect and I doubt these are the immigrants other economists are envisioning.)  

Remarkably, trade does not appear anywhere in this discussion. In the old days, econ textbooks told students that relatively wealthy countries, like the United States, are supposed to be exporters of capital to relatively poor countries, like China. This was part of the story of comparative advantage, capital is relatively plentiful in rich countries and relatively scarce in poor countries.

Exporting capital means running trade surpluses. In fact we have been running trade deficits, and in the years since the East Asian financial crisis in 1997 (which sent the value of the dollar soaring) we have been running very large deficits. In the most recent quarter's data our deficit was just over $500 billion, or 2.9 percent of GDP. This creates a gap in demand that we have to fill from either more consumption, investment, or government spending.(That's definitional -- if you don't like it, that's too bad, it is an inescapable truth.)

Dean Baker / June 12, 2014

Article Artículo

Economic Growth

Government

Austerity and the Employment Rate

In 2010, after an initial round of coordinated stimulus from both wealthy and developing countries, deficit hawks around the world regrouped. Pointing to growing deficits and debt, they demanded that countries reverse course and begin moving toward balanced budgets. The deficit hawks argued that deficit reduction could be accomplished without impairing growth because of the effect it would have in boosting confidence among businesses and consumers.

Many economists argued against this drive towards austerity at the time. They noted and rigorously explained the fallacious logic in the idea that deficit reduction could be expansionary. They also pointed out how fiscal policy had already saved the economy from a second depression and that more stimulus would likely be necessary. However, now we have more than three years of data, so we no longer have to speculate. A simple picture can be worth a thousand words (or in this case, billions).

CEPR and Ben Wolcott / June 09, 2014

Article Artículo

Brazil

Latin America and the Caribbean

World

The World Cup Bus to Nowhere

The Rio de Janeiro city government inaugurated the most expensive public works project officially connected to the World Cup last week.  Although construction of some of the stations is expected to continue throughout the next few months, a new Bus Rapid Transit (BRT) corridor called the Transcarioca now connects Galeão International Airport to the wealthy beachside neighborhood of Barra da Tijuca, 39 kilometers away, without going anywhere near the city’s downtown, Maracanã soccer stadium or the tourist hotel neighborhoods on the city’s south side. The final cost of the project is estimated at R$2.2 billion (approximately US$970 million). Photos and videos of shoddy workmanship have cropped up on the Internet, and according to O Dia, a local newspaper, the inaugural voyage had only one paying passenger.

Despite spending around R$4 billion preparing for the World Cup, Rio de Janeiro, with a metropolitan area of over 12 million people, remains one of the world’s largest cities with no direct public transportation link between its international airport and downtown. Officially billed as a means by which World Cup tourists will move around the city during the games, the only apparent use of the Transcarioca will be to connect tourists to nearby metro or train lines which could have just as easily been connected to the airport if it weren’t for what author and geographer Chris Gaffney calls the “mafiaesque” influence that the city’s 49 private bus companies have on the city’s transportation policy.

The Brazilian government estimates that it has allocated R$25.8 billion on the World Cup, divided roughly in thirds between stadium construction and reformation; airport and infrastructure improvement; and public transportation projects. Although there is a large public outcry from across the political spectrum over the amount of money spent, especially on stadiums, some of the comparisons made with things like health and education have been blown out of proportion.  Even Folha de São Paulo newspaper, a traditional enemy of the ruling PT party, admitted recently that: 1) the total amount spent on the World Cup over the course of seven years is equivalent to around one month’s spending on public education; 2) most of this money was lent by the BNDES (the Brazilian National Economic and Social Development Bank); and 3) a large proportion of the money lent went to the private sector, as in the case of stadium construction and reformation in cities like São Paulo and Curitiba, and will be paid back with interest.

CEPR and Brian Mier (Guest post) / June 09, 2014